Powell Voiced Concern in 2013 Fed Bond Buys Were Warping Markets
(Bloomberg) -- Federal Reserve Chairman Jerome Powell voiced concern that the central bank’s bond purchases were distorting financial markets and pushed for an early start to reducing them back when he was a governor in 2013, transcripts of meetings that year show.
Powell, who took over as chairman in February 2018, had advocated beginning to scale back the Fed’s quantitative-easing program as early as June of that year, according to the record of policy makers’ conversations released Friday with their customary five-year lag.
The central bank didn’t actually begin to cut back its purchases until December, after the markets were spooked in the middle of that year by hints the plan would start sooner -- the so-called taper tantrum.
“I believe that we ought to take the next plausible opportunity reduce the pace of purchases, and I hope that time will come in June,’’ Powell said at the Federal Open Market Committee’s April 30-May 1, 2013 meeting.
The release of 2013 transcripts comes as the Fed presses ahead with an ongoing reduction of its bond holdings by a maximum of $50 billion per month. Some critics have charged that the strategy has led to turbulence in the financial markets by suggesting that the Fed will push ahead with tightening monetary policy regardless of what happens to the economy.
While Powell has played down the significance of the balance-sheet roll-off, he’s left open the possibility the Fed would alter it if necessary.
In comments reminiscent of some of the complaints now being made by the Fed’s critics, Powell warned back in January 2013 that QE was warping financial markets.
“There’s also reason to be concerned about the growing market distortions created by our continuing asset purchases,’’ Powell told fellow policy makers at the Jan. 29-30 FOMC meeting. While he didn’t think a crash was imminent, “there is every reason to expect a sharp and painful correction.’’
Powell has since acknowledged that some of the fears he had about asset purchases back then didn’t materialize. While “it was appropriate to raise them, they didn’t really kind of bear fruit,’’ he told economists in Atlanta on Jan. 4. “We didn’t see high inflation, we didn’t see asset bubbles.’’
In May 2013, then-Fed Chairman Ben Bernanke helped set off a surge in Treasury yields when he hinted publicly at the possibility the U.S. central bank would start thinking about tapering the monthly rate of bond purchases it was making under the QE program it had launched in September 2012. Investors saw his comments as also heralding a rise in interest rates from near zero levels.
Powell reacted to the tantrum by suggesting Fed policy makers had failed to provide a strong enough justification for why they were considering a slowdown in asset purchases and how limited the planned change would be.
“The first reduction should be seen as a calibration and an acknowledgment of material progress on the road to full employment,” Powell said at the June 18-19 meeting. “Instead, we have let the market see it as perhaps a signal that we’re moving to end the program and raise rates. We’ve let it become too important.”
He said it was up to Bernanke get the Fed’s message across in the press conference that followed the meeting.
“Going forward today, much rests on the shoulders of the Great Communicator,” said Powell, referring to Bernanke. “It’s appropriate to give LeBron the ball at the end of the game,’’ he added, referring to U.S. basketball great LeBron James.
Now, of course, Powell finds himself playing the LeBron role for the FOMC. And judging by the wild market swings in response to his balance-sheet remarks in recent weeks, the Fed is still having trouble explaining its strategy on that front -- and what it means or doesn’t mean for short-term interest rates.
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